Did you know that you can set up a limited liability company (LLC) under a specific management structure? A business that decides to incorporate as an LLC has the opportunity to form one of three LLC structures:
Single Member LLC
Member Managed LLC
Manager Managed LLC
What is the difference between each of these management structures as opposed to a standard LLC? Let’s take a closer look at what it means to incorporate as an LLC and what each management structure can do to benefit your business.
What Does LLC Mean?
A limited liability company, often abbreviated as LLC, is a business structure. A small business that chooses to incorporate as an LLC receives limited liability protection. This creates a separation between professional assets and personal assets, like houses and cars, that belong to the entrepreneur. In the event of an unforeseen circumstance, such as a lawsuit or business debt, having incorporated as an LLC ensures that the owner’s personal assets are not negatively impacted.
Incorporating as an LLC turns you, the owner of the business, into a member. You are still the business owner. Now, you hold membership interest since you incorporated as a limited liability company.
An LLC may have just one sole member. It may also have multiple members as a multi member LLC. This is particularly true of LLCs that are member managed versus manager managed. Let’s review these three LLC structures to learn more about member managed versus manager managed LLCs as well as single member LLCs.
Single Member LLC
One of the biggest differences a single member LLC has versus a standard LLC is in its name. A single member LLC only has one sole member. Standard LLCs, however, may bring on multi members to run the business.
Is it easier to run a single member LLC? Upon first glance, this type of LLC structure almost looks like the proverbial sole proprietorship of the LLC family tree. However, single member LLCs face their own unique management challenges. A standard LLC is treated as a partnership at the federal level. A single member LLC, on the other hand, is not considered to be a partnership.
How to Incorporate as a Single Member LLC
What does that mean for entrepreneurs incorporating as single member LLCs? It is up to the single member to have, and maintain, proof that they are able to run operations within a single member LLC like a standard LLC and treat the business like a separate entity. Parts of said proof may include drafting a single member LLC operating agreement and taking minutes during meetings. Failure to do this may result in having your liability protection revoked. It may feel a little silly, even unnecessary, to do all this paperwork since you are the LLC’s only member. However, it’s worth taking the time and effort to maintain a single member LLC.
Each state in the United States recognizes single member LLC formations. This means you can start a business from any state as a single member LLC. The process for forming a single member LLC is also quite similar to a standard LLC formation. An entrepreneur files their articles of organization with the designated Secretary of State and pays the associated filing fee. Keep in mind that articles of organization will ask for all of the LLC’s members. It’s perfectly acceptable to list only yourself on the documents. After all, you’re filing as a single member LLC.
Member Managed LLC
What does member managed LLC mean? Each member in a member managed LLC is treated as an equal. In this management structure, each member shares the same amount of responsibility for how the LLC’s operations are run on a day-to-day basis.
Does a member managed LLC have a board of directors? No. This is due to the equality of its members. Having a board of directors would disrupt the entity’s natural equality balance.
How to Incorporate as a Member Managed LLC
The ideal business to form a member managed LLC is one where the members all want to be equally involved with running the company. It is also a suitable fit for small businesses with limited resources.
Before filing to form a member managed LLC, make sure you specify that the business will be member managed on your application forms. Most LLC articles of organization will let you check off a box indicting that you are forming a member managed LLC versus a manager managed LLC.
Then, you may submit the organizational form and pay the filing fee to the Secretary of State. As with a single member LLC, it’s also important that you keep and maintain up-to-date operating agreements. The duties of the members in a member managed LLC may be equal, but they must be documented for the sake of both clarification and posterity in the business.
Manager Managed LLC
We’ve reviewed what to do as a single member LLC and as a member that shares equal duties in a member managed LLC. Manager managed LLCs, however, tend to be the most complicated of the three LLC structures.
What is the difference between a member managed and manager managed LLC? Manager managed LLCs come with a board of managers. This is similar to a board of directors. The board of managers has more control over the business than the members do and take more responsibility for its operations.
How to Incorporate as A Manager Managed LLC
A manager managed LLC is the most structured of the three management structures. However, this can also serve to the members’ benefit in the long run.
If an LLC has too many members and struggles to delegate duties to each one, then it would be helpful to have a board of managers in place for organizational purposes. Conversely, some members of an LLC may not want the responsibility of running the business—and the board in managers is there to step in as needed.
A board of managers doesn’t have to be entirely composed of the LLC’s members either. Manager managed LLCs may hire non-members to sit on the board as well.
Much like filing to form a member managed LLC, manager managed LLCs must indicate that their company is manager managed on their paperwork. Once they have made that readily clear, they may submit their formation paperwork in and pay the filing fee.
Which LLC Structure Is Best For Business?
Every small business is different, so I cannot advise with certainty whether one of these three management structures — single member LLC, member managed LLC, and manager managed LLC—is the best fit for your company.
If you are unsure of which to incorporate as, consult with an attorney or legal professional. Ask them any questions about the process you may have and work together to determine the proper LLC structure for you and your business.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Twitter @deborahsweeney and @mycorporation.